In the middle of an unprecedented presidential campaign, then candidate and now President-elect Trump repeatedly called for a renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada. He threatened to withdraw the U.S. from the Agreement if either Party refused to renegotiate. Although it is unknown how this campaign rhetoric will turn into policy, from a legal perspective there are a number of issues that should be addressed.
Commentators have taken different views as to whether the President can unilaterally terminate NAFTA or other free trade agreements without Congressional approval. However, many believe President-elect Trump can walk away from free trade agreements without receiving permission from the House and Senate. Regardless, a decision by the United States to cancel NAFTA would trigger Article 2205 of the Agreement. This provision allows any member to withdraw “six months after it provides written notice of withdrawal to the other Parties.” In short, the United States’ participation in NAFTA may be officially terminated six months after notice of its intentions are provided to the other Parties. There is no sunset period beyond this six-month notice period.
The legal consequences of withdrawing from NAFTA are significant. One aspect investors should be particularly concerned with is the elimination of the Investor-State Dispute Settlement (ISDS) protections contained in Chapter 11 of NAFTA. This would exclude certain investors from enforcing their rights under the Agreement against illegal expropriations, or arbitrary or discriminatory actions by other treaty Parties. In other words, if the United States withdraws from NAFTA, U.S. investors would no longer be able to bring investment claims against Mexican and/or Canadian authorities before international arbitration tribunals for breaches of international law.
The effects of Article 2205 of NAFTA suggest that investors would be able to bring new cases during the six months between the notice of withdrawal and the date it becomes effective. However, investors will actually have a much smaller window to initiate arbitration. Article 1119 of NAFTA states that a disputing investor “shall deliver to the disputing Party written notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted.” This means that an investor will only have 90 days to bring a new case in order to be allowed to submit formal arbitration before the withdrawal takes effect.
Unlike other treaties, which typically secure the continuity of investment protections for 10 to 15 years after treaty termination, NAFTA does not include any protective provisions other than the six-month notice period. The potential termination or renegotiation of NAFTA, plus the 90-day notice period prior to initiating a formal arbitration as required under Article 1119, creates a measure of potential uncertainty for investors, who would be forced to act within the short 90-day window if NAFTA were terminated. Although this scenario may be unlikely, the 2016 U.S. presidential election and the United Kingdom’s referendum to leave the EU in June have provided clear lessons for investors to be prepared for any possible scenario.